Appeals from the United States District Court for the Southern District of Indiana, Terre Haute Division. No. 2:07-cv-00225-William G. Hussmann, Jr., Magistrate Judge.
The opinion of the court was delivered by: Wood, Circuit Judge.
Before WOOD, WILLIAMS, and TINDER, Circuit Judges.
Trans-Care, an Indiana company that furnishes ambulance and other medical transportation services, wanted to replace its dispatch and billing software. After looking around, it chose Digitech Computer for the job. The two executed a software licensing agreement, but it was not long before the deal went sour.
The software did not work as Trans-Care expected, and so Trans-Care attempted to exercise an option to terminate the agreement. Digitech believed that Trans-Care had no such option and that its attempted termination was a breach of the contract. It sued, and Trans-Care shot back with a counterclaim for fraud. The court, acting through a magistrate judge presiding by the consent of the parties under 28 U.S.C. § 636(c), dis-missed Trans-Care's claim for fraud and found for Digitech on the breach of contract claim. The court then awarded Digitech fees under the contract, including attorneys' fees for pursuing the contractual damages. It refused, however, to award Digitech any attorneys' fees for defending the counterclaim. Both parties appeal. Trans-Care challenges the decision on fraud, breach of contract, and the amount of damages awarded. Digitech challenges the limited award of attorneys' fees. We affirm the decisions on fraud and breach of contract, but we vacate the damages award and remand for further proceedings.
After some preliminary exchanges, Digitech sent an initial proposal to Trans-Care on February 3, 2006. That proposal set out the basic features of Digitech's dispatch and billing software and details on pricing; it also included a provision that the parties have described as a 90-day satisfaction guarantee. This guarantee stated that during the first 90 days, billing would be limited to programming charges; within that period, if Trans-Care was not completely satisfied, it could walk away from the contract without paying any software licensing fees.
This initial proposal did not purport to be a take-it-or-leave-it contract; instead, it launched a period of extensive negotiations between the parties, which ended when Digitech sent Trans-Care the final Agreement dated May 8, 2006. Trans-Care signed and returned it, along with a purchase order. The purchase order concluded with the following "Additional Conditions": "The Proposal and clarifications of Digitech are attached to this purchase order and incorporated herein." It also represented that Digitech would "fulfill all requirements and specifications as represented in the Agreement, proposal and clarification . . . ." The purchase order allowed deviations, but only after advance approval from the President of Trans-Care or his designee.
The Agreement stated that it was to run for three years starting May 8, 2006. Trans-Care's obligation to make monthly software licensing payments was to begin 90 days after the software was installed. For its part, Digitech could "suspend or terminate" the software products and services in the event that Trans-Care was delinquent in payment for 60 days. The Agreement provided that Digitech could recover attorneys' fees for "collections of any unpaid balances." Finally, it required notice and the opportunity to cure before termination.
The parties planned to go live with the software on August 1, 2006, but it was not until January 1, 2007, that the software was finally up and running. Even after this, the software was plagued with malfunctions relating to, among other things, transferring data from Trans-Care's previous software system, training Trans-Care employees to use the system, and operating the system to fit Trans-Care's regular needs. In light of these problems, on March 1, 2007, Trans-Care attempted to exercise its opportunity to walk away from the arrangement within the 90-day "guarantee" period. But that provision had not been repeated in the Agreement, and so Digitech refused to honor it. Trans-Care parried by withholding its payments to Digitech. Finally, on April 3, 2007, Digitech locked the software because of Trans-Care's failure to make the contractual payments.
This impasse led in short order to litigation. Digitech sued in Indiana state court for breach of contract, and Trans-Care responded with a counterclaim for fraud, arguing that Digitech had misrepresented that the contract contained the 90-day guarantee. Trans-Care then removed the action to the federal district court, relying on diversity jurisdiction. After about a year of discovery, the court dismissed Trans-Care's fraud and punitive damages counterclaims in response to a motion for sum-mary judgment. The rest of the case proceeded to a bench trial, after which the court found for Digitech on its breach of contract claim and awarded software licensing payments for 33 months and fees for software customization and training. In addition, the court ordered that Digitech was entitled to attorneys' fees for the breach of contract action, but not for defending against Trans-Care's counterclaims. This timely appeal and cross-appeal followed.
We first consider Trans-Care's counterclaim for fraud, which centers around the alleged 90-day, no-questions-asked, guarantee that it thought Digitech had offered in the initial proposal-a term that it contends was later incorporated into the agreement by way of the purchase order. When Digitech failed to honor this guarantee, ...